Large Spanish banks enjoyed an overall improvement in profits and provisioning trends in the first quarter, but regulators have warned that credit risk could increase later in 2021 as the COVID-19 pandemic unfolds.

Of the top five lenders in the country by assets, only Banco de Sabadell SA saw a decline in net income compared to a year ago. CaixaBank SA reported the largest jump, with the result including a negative goodwill of €4.3 billion related to its merger with local peer Bankia. Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and Bankinter SA also saw profits rise.

The improved profits were in large part attributable to lower loan loss provisions. All of the five biggest banks in the country recorded lower provisions year over year in the first quarter. CaixaBank saw the biggest decline, at 66%, followed by BBVA at 56.3% and Santander at 48.5%.

"The vast majority of banks were delivering pretty decent profit beats versus consensus expectations, and the biggest driver of that was provision-led. There was a reasonable level of front-loading of provisions last year," Benjie Creelan-Sandford, bank equity analyst at Jefferies, told S&P Global Market Intelligence.

Meanwhile the ratio of nonperforming loans as a percentage of total loans at March 31 was lower or the same compared to a year ago for all five except BBVA, whose ratio increased to 4.81% from 4.52%.

But Spain's central bank has issued a caution about asset quality.

"The fact that NPLs have not increased in the near term does not rule out the possibility of greater credit default risk materializing in the medium term," the regulator said in its annual report.

It cited public support measures that have helped borrowers continue to repay loans.

"We have loan moratoriums, we have [loans issued by state financing agency ICO] here in Spain. So we are not seeing the real economic damage of the crisis. So that is probably going to be a story for the second half of the year," said Gonzalo Lopez, bank equity research analyst at Redburn.

Vice president of global financial institutions at DBRS Morningstar, Pablo Manzano, said the important milestone banks need to pass is the expiration of moratoriums, of which the bulk are going to expire in the second quarter.

Spanish bank lending to the sectors severely affected by the pandemic stood at less than 20% of total lending at the end of 2020, according to the central bank. When loans to moderately affected sectors are added, the figure climbs to more than 50%.

Lopez said banks need to be prudent and book additional provisions like they did in 2020. This was not seen in the first quarter, so there is a risk of incremental provisions in the next few quarters.